Thursday, February 4, 2010

Global IPO Market 2010 Outlook: Slow Activity and Strong Exits

If history is ever a good predictor of the future, 2010 is going to remain slow in IPO activity but may showcase a few very strong exits for fundamentally sound companies, Graham Powis, Managing Director and Head of U.S. Equity Capital Markets, Lazard Ltd., asserted on January 28th during a panel discussion organized by FTSE and Renaissance Capital exclusively for New York Society of Security Analysts members.

Right now, private equity firms affected by credit dislocation and the recession have one primary goal: to ascertain the quality of IPO opportunities as an exit strategy for the global private sector. While other exit considerations include dividends financing in the debt markets and despite the fact that valuations are substantially lower than what the IPO market achieved from 2000 to 2005, General Partners are concerned with returning capital to their LP investors.

Christopher Turner (Warbug Pincus), Phil Drury (Citigroup), and Jonathan Art (Federated Kaufmann Fund) of the same panel, moderated by William Smith, CEO of Renaissance Capital, agreed that uncertain capital origination, market ambiguity, and indeterminate liquidity exemplify an opportunistic market. This type of market has a two-sided effect: on one side, researchers observe low willingness on investors’ part to join in public offerings within volatile markets paired with high preference for less risky deals; on the other side, capital markets participants recognize the IPO market as a highly inefficient category of public equities.

Inefficiency is good. In fact, for sophisticated investors inefficiency is great. Paul Bard, Head of Research for Renaissance Capital, demonstrated that the IPO market presents experts with the opportunity to create investing strategies with remarkable returns. As an indication, while the returns for the Russell 3000 and S&P were -5.8% and -8% respectively in 2009, the IPO index registered returns of 28.5% for the same year.

The inefficiency of the IPO market is based on the following facts: private companies are not well researched; they operate within new industries; their management teams are relatively unknown; private companies have not been traded yet and therefore the predictability of their success in trading is practically impossible. A bottom-up fundamental study of IPOs as well as expertise based on historical data lead researchers to believe that 2010 may be the year for some very strong companies to go public as it happened in the 1970s, another period of slow activity. With an approximate number of 100 to 120 deals in the pipeline, of which 39% in Technology and Healthcare, the sophisticated investor has the advantage of deep discounts in some fundamentally strong, top performing private companies that promise high quality operations, overall growth, and proven profitability.